Tyler Technologies, Inc. — Q3 2021 Form 10-Q
Business context and reporting period: Quarter and nine months ended September 30, 2021. Tyler provides software and services to public-sector customers. Results include NIC from its April 21 acquisition; NIC is reported as a separate segment. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless noted.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $459.9M | $285.7M | $1,158.8M | $833.4M |
| Gross profit / margin | $196.2M / 42.7% | $143.5M / 50.2% | $522.5M / 45.1% | $403.8M / 48.5% |
| Operating income / margin | $56.2M / 12.2% | $49.7M / 17.4% | $132.7M / 11.5% | $124.9M / 15.0% |
| Net income | $44.2M | $39.3M | $106.7M | $140.7M |
| Diluted EPS | $1.04 | $0.94 | $2.53 | $3.39 |
| Operating cash flow | Not separately stated | Not separately stated | $256.7M | $266.3M |
Revenue mix and growth: Q3 revenue increased 60.9%; nine-month revenue increased 39.0%. Excluding 2021 acquisitions, growth was 7.6% and 8.4%, respectively. Subscriptions revenue rose 183% in Q3 and 116% year to date, primarily reflecting NIC and continued SaaS and transaction-based growth. Recurring subscriptions and maintenance represented 79% of nine-month revenue.
Liquidity and debt: At September 30, cash and cash equivalents were $234.1M, with $114.3M in investment-grade bonds; management reported $348.4M of cash and investments. Principal borrowings were $842.5M under the credit agreement and $600M of 0.25% convertible notes due 2026. The credit facility had $500M of available capacity; the company reported compliance with its covenants. Current assets were $878.3M and current liabilities $816.2M. Cash declined from $603.6M at year-end, substantially reflecting acquisition spending.
Material changes versus prior periods
- NIC contributed $150.6M of Q3 revenue and $249.7M for the period since acquisition. The $2.0B NIC acquisition drove significant increases in subscriptions, goodwill, intangibles, and debt.
- Q3 net income rose year over year, but nine-month net income and EPS declined. The nine-month comparison included a $14.1M income tax benefit in 2020, while 2021 had an $8.9M tax provision; 2021 also included materially higher interest and acquisition-related amortization and costs.
- Gross margin fell to 42.7% in Q3 and 45.1% year to date, partly because NIC had lower margins and recent acquisitions increased acquired-software amortization. Excluding 2021 acquisitions, overall gross margin was 48.3% for Q3 and 48.5% for the nine months.
- Q3 operating cash flow was not separately provided; nine-month operating cash flow was $256.7M versus $266.3M. Investing used $2.085B, primarily for acquisitions; financing provided $1.459B, principally from debt issuance.
- Backlog was $1.77B, up 14.3% from a year earlier; management expected approximately 47% to be recognized as revenue over the following 12 months.
Outlook, commentary, and risks
- No formal revenue or earnings guidance was provided. Management forecast 2021 capital spending of $47M–$49M, including approximately $21M of capitalized software development.
- NIC TourHealth and pandemic-unemployment offerings contributed $43.3M of Q3 revenue and $58.4M for the nine months. The company expected these COVID-related revenues to decrease significantly in Q4 2021 and wind down in the first half of 2022.
- COVID-19 continued to delay some government procurement and implementations, affecting license sales and services; virtual delivery reduced billable travel revenue. Management said appraisal and software-services activity was recovering as travel restrictions eased.
- Key risks include government budget and procurement changes, cybersecurity and service continuity, acquisition integration, variable-rate debt and covenant restrictions, and the ability to meet debt payments or cash settlement obligations on convertible notes. A 0.25 percentage-point interest-rate change would affect annual interest expense by approximately $2.1M, based on reported credit-agreement debt.
- The September 2020 ransomware incident was described as contained, with investigation and remediation completed. The filing reported $410,000 of expenses, approximately $195,000 of accrued insurance recoveries, and $755,000 of insurance recoveries received during the first nine months of 2021.
- Management reported no goodwill or other-asset impairment as of quarter-end. Acquisition purchase-price allocations remained preliminary, and estimates could change. The filing reported no material pending litigation apart from routine matters, while noting a $3.2M litigation accrual in SG&A for the nine-month period.
Important facts for investors to verify
- How much reported growth and recurring revenue persists after NIC integration and the expected wind-down of COVID-related services.
- Whether margins recover as acquisition-related mix, acquired-software amortization, staffing, and implementation costs evolve.
- Cash generation, acquisition returns, debt repayment capacity, variable-rate exposure, covenant headroom, and potential convertible-note dilution or cash settlement needs.
- Final purchase-price allocations and the assumptions supporting the carrying values of NIC-related goodwill and intangible assets.
- Progress on government procurement delays, cybersecurity remediation, and any changes in litigation or insurance recoveries.